Chapter
A Study on the Value of B2B E-Commerce: The Case
of Web-based Procurement
Chandrasekar Subramaniam and Michael J. Shaw
Department of Business Administration, University of Illinois at Urbana-Champaign
Abstract:
Web-enabled business-to-business (B2B) e-commerce enhances interorganizational coordination and results in transaction cost savings and
competitive sourcing opportunities for the buyer organization. However,
organizations are unsure if this is an improvement over existing information
technology such as EDI. In particular, what is the value of B2B e-commerce
to a buyer organization and how to measure this value? What factors most
affect the realization of the value of B2B e-commerce? Using the case of
Web-based B2B procurement system, we propose a framework to quantify and
measure the value of B2B e-commerce system and identify the factors that
determine this value. Our analysis indicates that, even though all stages of
B2B procurement is affected by the Web, the value of Web-based procurement
is most determined by the process characteristics, organization of business
units and the “extended enterprise”.
Key words:
Inter-organizational information systems, Value of B2B e-commerce,
Web-based procurement, Measurement of value, Extended enterprise
1.
INTRODUCTION
Business-to-business (B2B) e-Commerce technologies and electronic
markets are emerging as the critical infrastructure of modern Web-enabled
organizations. The Internet and the Web provide a cost-effective mechanism
for organizations to engage in search, negotiation and coordination with their
suppliers anywhere in the world (Buxmann and Gebauer, 1999; Kalakota
and Robinson, 1999). At the same time, the Web is also being used to
integrate and manage business processes across traditional firm boundaries
to create an “extended enterprise” of the firm and its business partners
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C. Subramaniam & M. Shaw
(Shaw, 2001). However, even in the face of these opportunities and
seemingly easier to implement Web-based technologies, many organizations
have been surprised at the range of responses shown by both their business
units and business partners. On the one end of this range, there are users
who strongly feel the need for a Web-based system and are enthusiastic
about it. On the other end, there are users who are certain that a Web-based
system can offer no improvement over their existing systems and
procedures. In between, there are users with different expectations regarding
the usefulness and preferred features of a B2B system.
Central to the concerns expressed by potential users of B2B e-Commerce
systems is the lack of any sound framework to precisely determine the value
of a B2B system from the perspective of user as well as the enterprise. In
this context, managers responsible for implementing B2B systems are faced
with the challenge of convincing all potential users, internal and external to
the organization, of the real value of these systems. Medium and large
manufacturing firms, with their decentralized and focused facilities, face
more challenges in implementing B2B e-Commerce systems because of
greater variation in the nature of their business operations and, often
conflicting, objectives of their internal units.
Our research objective is to develop and validate a framework to better
understand the value of B2B e-commerce and the factors that affect this
value. More specifically, we propose that process and organizational
attributes play a significant role in determining the value of B2B ecommerce. Using Web-based B2B procurement, also called e-procurement,
as a case of B2B e-commerce, we develop a framework to theoretically and
empirically determine the value of B2B systems and to verify the role of
process and organizational attributes.
B2B procurement in most
organizations involves very unstructured processes and a broad range of
products and services, providing wide variations in the parameters that
determine the benefits from a Web-based system. Opportunities to improve
procurement activities have significant economic implications for the
enterprise. Our paper is organized as follows. The next section presents a
general model of an e-procurement system and introduces the major research
questions. We then review related research on the impact and value of IOS.
Extending this research to B2B e-commerce, we develop a framework to
determine the value of e-procurement. We use an economic model to
analytically evaluate the value of e-procurement and present some initial
findings from a study at a large manufacturing organization. We conclude by
discussing the implications of our findings for design and implementation
strategies.
20. Value of B2B E-Commerce
2.
3
B2B E-PROCUREMENT SYSTEM
The procurement of goods and services by organizations, called businessto-business (B2B) procurement, constitutes an important business activity.
Large organizations spend more than 15 to 30 percent of their revenue on
procurement of non-production goods, such as office equipment, supplies,
computers, and peripherals1. However, traditional B2B procurement
practices, particularly those related to non-production goods, have been
plagued by problems, such as inefficient buying, redundant and disconnected
processes, non-strategic sourcing and maverick purchases. Use of Webbased procurement solutions, also called e-procurement solutions, is
expected to address several of these problems (Buxmann and Gebauer, 1999;
Kalakota and Robinson, 1999).
An e-procurement system, shown in figure 1, is a Web-based
client/server application used to replace the manual procurement process.
The system is usually connected to other business critical information
systems in the enterprise, such as the enterprise resource planning systems
(ERP) or the electronic data interchange (EDI) systems. This is done to
leverage the critical enterprise data present on these systems, so that they
need not be duplicated on the e-procurement system. On the supplier side,
the e-procurement system can be integrated with the suppliers’ order
fulfillment system or may just link to product catalog on the website of the
supplier.
1
Aberdeen’s white paper
(www.aberdeen.com)
on
Indirect
Expense
Management,
November
2001
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C. Subramaniam & M. Shaw
Figure 1. Functionalities of a Web-based procurement system
The Web-based capabilities built into e-procurement systems help
organizations create an efficient and responsive procurement process. More
specifically, use of e-procurement impacts four major B2B procurement
activities - search, negotiation and contracting, coordination, and monitoring
and control.
Search: Users and procurement personnel spend a considerable amount
of time in just identifying the right product and supplier to match their
business needs. A Web-based IOS, such as e-procurement system, is used to
quickly locate a required product or supplier. Using electronic catalogs and
intelligent search engines, users can search across product categories and
specifications to identify the right product to order in considerably less time.
Also, by linking to enterprise systems, such as ERP, and automatically
filling in the details necessary for the order, the Web-enabled user interface
minimizes the data to be input, thus avoiding a major source of errors and
mismatches.
Negotiation and contracting: Web-based negotiation and contracting has
had a significant impact on the costs to the enterprise. Use of Web reduces
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5
the time and resources spent by various parties in exchanging information
and processing the bids. As organizations consolidate their suppliers using a
more centralized Web-base system, the number of contracts to be negotiated
also reduces. Even though contracts form an important concept in
transaction costs, there has been surprisingly little discussion in the IT
literature of the effect of the Web on contracting.
Coordination: In addition to electronic processing at much lower costs
than manual processing, We-based systems can support increased and more
complex coordination. Coordination involves the sharing and exchange of
relevant information among the enterprise and its business partners. Several
times, during the fulfillment of an order, procurement personnel need to
communicate and exchange information with the suppliers and users.
Procurement systems based on paper documents and telephone involves
more time of the procurement staff and higher communication costs. Using
a Web-based procurement system provides real-time information flow and is
less costly to coordinate with suppliers and users. This leads to faster
resolution of any problems and results in lower order cycle time. The low
communication costs of the Web and the lesser time spent by the
procurement staff in coordination results in lower transaction costs.
Monitoring and control: Using a Web-based procurement system,
organizations can achieve their twin objectives of responding effectively to
the user needs as well as leveraging their combined buying power. Users
can search the catalog to identify the most cost-effective supplier and place
their orders. Corporate B2B managers can aggregate the demand for the
whole enterprise and use this to negotiate competitive prices for the
products, which they can then make available to any business unit,
irrespective of the size or location of the unit. Centralized control,
combined with the availability of an increased range of items on the
electronic catalog, motivates more users to order through the e-procurement
system, reducing the extent of “premium buys”.
The use of Web-based systems is expected to provide better value than
traditional IOS, because of the use of a public network and the much wider
scope of application within the enterprise (Gebauer, et.al., 1998). However,
the method used currently by most organizations to compute the value and
justify their e-procurement investment relies upon the average estimated
savings for a procurement transaction and the transaction volume. The
individual share, in the investment, of the internal business units is also
based on this simple estimation. This simple estimation ignores the
differences in the procurement needs and current processes within the firm.
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C. Subramaniam & M. Shaw
For example, using the current value estimation procedures, large business
units with higher transaction volume will share a higher proportion of the
investment, as they are deemed to benefit more. But, if they have
established efficient procedures in a non-Web environment, the benefits
from a Web-based system will be minimal. From the point of view of the
business unit, there is no justification for their investment in e-procurement.
Thus, we see that there is a need to understand how e-procurement value
differs within the firm and what attributes contribute to these differences. At
the same time, such an understanding should be based on theoretical support
and should be empirically verifiable. Thus, in our research on eprocurement, the major research questions are:
1. What is the value of B2B e-procurement to an enterprise? How
to measure this value?
2. What factors affect the value of B2B e-procurement?
3. What implications do the differences in value within a firm have
for the design and implementation strategies of e-procurement
solutions?
3.
A REVIEW OF RELATED RESEARCH
The impact of IT on firm performance has long been a subject of intense
research, with issues studied ranging from measurement of the impact, to the
conditions that are necessary to realize these impacts. The realized impact in
the form of actual improvement in firm performance represents the value of
the IT system to the organization. However, researchers have pointed out
the conflicting results yielded by these studies (Davern and Kauffman, 2000;
Hitt and Brynjolfson, 1996; Mukhopadhyay, et.al., 1995; Sircar, et.al.,
2000). Some of these issues relate to measurement, while others relate to the
complexity of isolating the effect of IT on firm performance
(Mukhopadhyay, et.al., 1995). Part of the problems of relating IT
investments to firm performance is the effect of confounding factors, such as
other internal performance improvement measures and external economic
influences. Another issue is that some IT investments may provide benefits
after a certain period of time, but may actually increase operating costs in the
short run (Kauffman and Kriebel, 1988). Researchers suggest a process
oriented approach to overcome these confounding problems. Kauffman and
Weill (1989) suggest that the locus of impact, i.e. the business process, be
the primary level of value analysis for the benefits to become discernible for
the investing firm. Barua, et.al. (1995) suggest a multi-stage, process
oriented study to measure the first-order and higher-order impact of IT.
20. Value of B2B E-Commerce
7
Mukhopadhyay (1998) uses such an approach to understand how EDI
benefits an organization.
Research on IOS impact and value, particularly use of EDI, has shown
that it is largely positive in improving the efficiency of business processes
and overall performance of organizations (Mukhopadhyay, 1998; Srinivasan,
et.al., 1994). The electronic processing and communication of inter
organizational data improves the timeliness and accuracy of the information,
allowing the trading organizations to better plan and manage their assets,
such as inventory (Barret and Konsynski, 1982). The use of IT improves the
process quality, which in turn improves the level of output (Mukhopadhyay,
et.al., 1997). This type of impact is mainly on the operational level and
results in cost reduction, higher productivity and improved quality
(Mukhopadhyay, 1998). IOS also increases the bargaining power of the
buying organization, which now has a better information visibility of its
business processes (Porter, 1985; Porter and Millar, 1985). At the same time,
however, by having access to more information about the buyer, a supplier
can better match the preferences of the buyer and extract a premium price.
The close relationship built between the buyer and the supplier may also
enable the supplier to gradually increase the level of business with the
buyers.
These impacts, however, are neither guaranteed upon implementation of
the system nor are they uniform across the organization (Barua, et.al., 1995;
Davern and Kauffman, 2000; Mukhopadhyay, 1998; Weill and Olson, 1989).
Realization of the value of the system is conditional upon internal and
external factors, some of which are controllable by the organization (Weill
and Olson, 1989). These are called conversion contingencies, i..e “a
spectrum of things that are likely to influence realized value from a system”
(Davern and Kauffman, 2000). For example, the contribution of IT system
depends on other resources, such as people and investments in associated
processes (Kauffman and Kriebel, 1988). In a study of EDI impact,
Mukhopadhyay (1998) found that the level of operational benefits of EDI
increased with increased integration of IOS with internal systems, but
decreased with more parts variety and number of trading partners. Suppliers
handling a higher proportion of their business electronically saw higher
performance than other suppliers. With respect to strategic impact, the size
of the supplier determined what incentives are needed to join the system.
The strategic benefits were found to be higher if the buyer initiated the
system or if the system had been used for a longer period of time.
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Even while some of the issues and critical variables of previous research
are relevant for Web-based systems, some issues and variables assume
increased importance. The capability of EDI to reduce the communication
and processing costs and errors are also found in Web-based systems. But,
in Web-based systems, the potential to reduce search costs is great and
affects each B2B transaction. Thus, in our research, for example, savings in
search cost emerges as an important economic benefit. Coordination costs
are reduced significantly by using the Web and our research quantifies the
extent of economic impact of this reduction. The Web allows organizations
to choose from different procurement models, an issue that did not arise with
EDI systems.
Many studies have looked at different pieces of the B2B puzzle, such as
supplier selection (Bakos and Brynjolfsson, 1993; Barua, et.al., 1997) and
impact of electronic markets (Bakos, 1998; Gurbaxani and Whang, 1991).
B2B e-commerce is rapidly transforming how organizations structure and
coordinate their business relationships, but there are very few systematic
studies in this area that tries to understand the impacts comprehensively from
an organizational perspective. In the following sections, we develop our
B2B value framework and evaluate the role of business factors in
determining the level of the impact.
4.
VALUE OF WEB-BASED PROCUREMENT
Our framework is based on a multi-stage impact model of information
technology on enterprise processes (Barua, et.al., 1995; Kauffman and
Kriebel, 1988; Hitt and Brynjolfson, 1994; Mukhopadhyay, 1998). The
principle is that certain features or capabilities of the Web are used to enable
B2B operations, which have impact on a set of intermediate variables. These
intermediate variables lead to improvement in the performance variables.
Any improvement in each of the performance variables contributes to the
improvement of the effectiveness of the procurement process, which is the
B2B goal of the enterprise. The framework is shown in figure 2.
20. Value of B2B E-Commerce
9
Figure 2. Framework for the value of Web-based procurement
Our level of analysis is “product category”, which is a collection of
procurement transactions of products with similar procurement
characteristics, such as demand, search, coordination, and control. From a
practical stand point, organizations groups purchases of products into similar
categories, as it helps them to establish uniform procedures and business
rules for a category, instead of for each product or transaction. Hence, for
example, all office stationery, including paper clips, printing paper, and
other stationery items, are grouped in a category called “office-supplies”.
We expect the impact of e-procurement to be similar on transactions within
each category and different across categories. For each “procurement
category”, we identify the benefits and costs of e-procurement to arrive at
the value for this “procurement category”.
4.1
Impact on B2B tasks
A Web-based procurement system provides enhanced search capabilities,
faster and accurate processing, real-time and rich-media information support,
and low communication and coordination costs (Buxmann and Gebauer,
1999; Luckling-Reiley and Spulber, 2000). From the buying enterprise point
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of view, use of a Web-based system affects four major categories of B2B
operations - search, order processing, monitoring and control, and
coordination.
Search: Search costs are costs incurred by the buyer to locate an
appropriate seller and purchase a product (Bakos, 1997). Search costs in
procurement are incurred at two places – when the professional buyer looks
for a supplier for contracting purchases and when the individual user in the
organization looks for the appropriate product to order. In both cases, the
Web and associated search engines considerably lower the search costs,
which can be quite significant in large organizations. Web-enabled search
engines help users to easily search using multiple methods to ensure that she
can find the right product even with limited available information. This
“user-friendliness” of the system reduces the “premium buys”, where the
user goes around the procurement system and incurs higher processing and
product costs (Kalakota and Robinson, 1999).
Processing: Web-based procurement system involves electronic
document routing and information flow, thus reducing labor costs involved
with manual processing. Web-based system can automatically route the
product request for the necessary approvals and order placement with
suppliers. This reduces the transaction cycle time and gets the materials to
the user faster. As the system requires minimum data inputs during the
information processing cycle, much of the sources of errors are eliminated.
Thus, we find that Web-based procurement processing lowers the cycle time,
errors and the processing costs.
Monitoring and control: Using a Web-based procurement system,
organizations can achieve their twin objectives of responding effectively to
the user needs as well as leveraging their combined buying power. Users
can search the catalog to identify the most cost-effective supplier and place
their orders. Corporate B2B managers can aggregate the demand for the
whole enterprise and use this to negotiate competitive prices for the
products, which they can then make available to any business unit,
irrespective of the size or location of the unit. Centralized control, combined
with the availability of an increased range of items on the electronic catalog,
motivates more users to order through the e-procurement system, reducing
the extent of “premium buys”. Thus, the major benefits of Web-based
monitoring and control are reduction in average product price and reduction
in “premium buys”.
20. Value of B2B E-Commerce
11
Coordination: One of the major advances of Web-based IOS over other
traditional IOS, is its ability to support increased and more complex
coordination. Several times, during the fulfillment of an order, procurement
personnel need to communicate and exchange information with the suppliers
and users. Using a Web-based procurement system provides real-time
information flow and is less costly to coordinate with suppliers and users.
This leads to faster resolution of any problems and results in lower order
cycle time. The low communication costs of the Web and the lesser time
spent by the procurement staff in coordination results in lower transaction
costs.
4.2
Impact on performance measures
The impact of the use of Web for B2B on performance measures can be
discussed based on the concept of first order and higher order impacts
suggested in IT literature (Barua, et.al., 1995; Kauffman and Kriebel, 1988).
The first order impact is on intermediate measures that are closer to the
process, which in turn affects the performance measures. One of the most
visible performance impacts of Web-based procurement is the lower total
procurement cost. The reduction in transaction cycle time, caused by the
use of Web-based procurement, reduces the labor time used in the process
and the labor cost component of the transaction costs. Costs incurred due to
electronic processing and coordination is several magnitudes lower than
those involved in manual processing and coordination. Lower incidence of
errors in a Web-based procurement system reduces the need for labor for
error resolution, reducing transaction costs. With less lead times for
acquiring products, organizations can store less in inventory and increase
inventory turns, leading to lower inventory costs. Lower average price
negotiated for contracted items and the lower product development costs
contribute to the reduction in the total procurement costs.
Quality of the procurement process is an indicator of how well the
system meets the procurement needs of the enterprise. Any error in the
processing cycle decreases the chance that the product delivered to the user
will fully meet her expectations. A measure of process quality is the
proportion of B2B orders rejected or returned by the user. Another measure
is the number of user complaints about the product. By reducing the
probability of errors, a Web-based system can reduce the potential mismatch
between user needs and the delivered product, thus reducing user
complaints.
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User satisfaction refers to the perception of the user in the system’s
effectiveness to meet her business demands. This is more than the receipt of
a matching product. User satisfaction is affected by how well the system is
perceived to meet user expectations. Higher cycle time and more errors in
the process leads to lower user satisfaction. Access to required information
with minimum effort, faster resolution of complaints, and ease of use of the
system interface are some ways in which user satisfaction can be improved
by a Web-based system.
System responsiveness is the ability of the B2B procurement system to
respond to the needs of the user and the enterprise. It reflects not only the
time taken to get the user what she needs, but also the ability to locate
alternative sources, within a reasonable time, if necessary. For example, a
user or a business unit may require a critical item to prevent the idling of
expensive production machinery. Delay in locating or procuring the item
may cost more, though indirectly, than even the cost of the item. In such
situations, a responsive system will help search internal and external
locations to find the item in the shortest time possible and the best way to get
it to the business unit.
In summary, by implementing a Web-based procurement system, a firm
can anticipate the following potential impact on its intermediate and
performance measures.
Impact on intermediate measures
Lower transaction costs
Lower inventory holding costs
Lower price
Impact on performance measures
Higher process quality
Lower total procurement costs
Increased user satisfaction
Increased responsiveness of the system
The potential value of a Web-based procurement system to an
organization is the extent to which it can derive benefits from the systems,
net of its investments and other implementation costs. One way to estimate
the value of a system is to quantify the improvements in the performance
measures in some economic terms. However, measuring and quantifying the
impact on the intermediate measures will provide more precise estimate of
20. Value of B2B E-Commerce
13
the value of the system (Kauffman and Kriebel, 1988; Mukhopadhyay,
1998), but require more detailed data at process level.
5.
FACTORS THAT AFFECT THE VALUE OF WEBBASED PROCUREMENT
Research on IT impact shows that implementing a system does not
automatically guarantee realization of the potential value (Barua, et.al.,
1995; Davern and Kauffman, 2000; Mukhopadhyay, 1998; Weill and Olson,
1989). The realized value depends on several conversion contingencies
(Davern and Kauffman, 2000). These conditions could be firm level
controllable conditions, such as training of users, or can be external
influences, such as actions of competitors and technology (Weill and Olson,
1989). The factors that affect the benefits and costs of e-procurement, and
hence its value, occur at three levels of increasing scope – procurement
process, organization of business units and the “extended enterprise”. For
each product category, it is possible to identify the values of these factors
and analyze the effect of these factors on the value of e-procurement for this
category.
The first level of factors is the process, where the use of e-procurement is
immediately felt. Research on information technology and transaction costs
has identified asset specificity and product description complexity, in
addition to transaction frequency, as important characteristics that affect the
impact (Malone, et.al., 1987; Williamson, 1996). With respect to eprocurement, we look at asset specificity more broadly as the specificity and
structuredness of the procurement process that affect the value. Also, we
look at complexity of not just product description but of the entire
procurement process. With the transaction frequency, these two
characteristics form the process level factors in our study.
The next level considered is the business unit, which is the principal unit
of e-procurement investment and implementation strategies. The value of eprocurement to a business unit can be determined by aggregating the value
of all its procurement categories. However, beyond the process, eprocurement creates a fundamental shift from decentralized purchasing to
centralized purchasing. As the major driver of the price benefits is the
increase in centralization, and the extent of decentralization in the current
procurement system is different in each business unit, the value realized for a
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C. Subramaniam & M. Shaw
category of procurement will depend on the change in centralization
achieved.
The third level considered in out study is the extended-enterprise. The
scope of B2B operations goes beyond the buying enterprise and extends to
the “extended enterprise”, to include all suppliers and other business
partners. However, differences in the market conditions of the underlying
procurement process create differences in the ability of the organization to
reduce the transaction costs and to negotiate better prices. Of these market
conditions, the most critical for e-procurement is the fragmentation in the
supply chain of the underlying product.
5.1
B2B process characteristics
B2B processes differ along several dimensions, such as specificity,
structuredness, variation in demand, frequency of orders, value of product,
extent of human intervention required and complexity of the tasks involved.
In this research, we propose to group these dimensions into two factors –
type and complexity. We note that in addition to the differentiation of the
processes based on these factors, the distribution of transaction volume in
each category plays an important role in determining the level of impact.
Process type: The procurement transaction of each product category is
associated with certain procedures, business rules, people involved and
systems used. On the one end, there are products with customized needs,
high demand volume and potential uncertainties associated with supply,
which can lead to high transaction costs for the buyer enterprise, if each
transaction has to undergo the supplier search, approvals, processing and
ordering. If the demand for such product is regular and the product
specifications do not change with time, organizations can reduce the
transaction costs by negotiating a long-term contract with a supplier and
designing an automated procurement process for reordering the items. We
call this type of procurement as “structured” procurement. Examples of such
procurement include tooling items, welding wires, and custom replacement
parts.
On the other end, there are some products that are not suitable for any
level of automated procedures. Often organizations allow the end-users to
take advantage of best deals available at the time of ordering and there is
very little benefit of tying such procurement to product-specific purchasing
steps with a particular supplier. These procurements tend to have very broad
20. Value of B2B E-Commerce
15
procurement rules giving plenty of freedom to the users to choose suppliers.
We call this type of procurement as “unstructured”. Examples of this
category of procurement include office equipment and furniture.
The structured ordering procedures result in very little time spent by the
user and procurement staff in the current process for search, input and
processing activities at the level of each transaction. The streamlined and
repetitive nature of the orders reduces the scope for errors in input and
processing. The use of Web is mainly to replace the paper based manual
communication with electronic communication. On the other hand, it is
difficult to set up meaningful automatic replenishment procedures for
unstructured procurement needs and every user request must be processed
individually and the order placed with suppliers. More time is spent in
search, input and processing for each transaction, mostly in the form of
labor. The greater variety of these requests and the higher human
intervention increases the incidence of errors, and staff time is spent more in
error resolution. When we Web-enable such unstructured procurement, we
save more on the resources used for search, input, processing and error
resolution. Thus, we expect the use of Web for unstructured processes to
result in higher value than its use for more structured processes.
Proposition 1: Use of Web-based procurement for unstructured
processes results in greater value than its use for structured processes
Complexity of process: The complexity of a transaction refers to the need
for additional efforts to process the transaction successfully. For example, a
critical component may have to undergo special inspection prior to any use,
requiring investments in testing equipments or inspection personnel. As the
complexity of a required item or ordering process increases, it involves more
transaction costs due to more search time, increased coordination
requirements, need for more data processing, and the higher probability of
errors. But, even if the complexity is high, if the transaction volume is
insignificant, the organization cannot expect significant value from the use
of Web. Hence, the realized value depends not just on the complexity of the
procurement process, but also on the transaction volume of this procurement
category.
Proposition 2: The value of Web-based procurement increases with the
complexity and transaction volume of the process.
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C. Subramaniam & M. Shaw
Organization of business units
The effect of the process level factors gives us a sense of its impact on
the value from the transactional perspective. However, the procurement
systems, which handle these transactions, serve different business units and
user constituencies, and each unit perceives and realizes different values
even from the same Web-based procurement system. The major factors that
determine the different values are the volume of transactions, the distribution
of the volume of different types of processes, and the existing degree of
procurement centralization in each business unit.
Size of business unit: The use of Web results in positive operational
benefits (in terms of cost savings) on each transaction, irrespective of its
type, even though the level of benefits may vary. The benefits accumulate
more as the volume of transactions of the business unit increases. Hence,
between two business units with similar distributions of the different types of
transactions, a larger business unit can be expected to derive higher
transaction cost benefits than a smaller business unit. In addition, the
benefits due to price reduction through centralization are higher for a
business unit with larger volume of B2B purchases.
Proposition 3: Among business units with similar distributions of
different types of B2B processes, larger business units realize higher values
from the implementation of Web-based procurement.
Dominant type of B2B process: While we earlier proposed the effect of
the types of processes in isolation, a business unit deals with a mix of
structured and unstructured processes. Some units, such as manufacturing
facilities, can be expected to have a dominance (higher proportion) of
structured procurement processes, while other units, such as sales or
administrative facilities, can be expected to have a dominance of
unstructured processes. The potential value of Web-based procurement
cannot be realized unless the dominant type of process is Web-enabled.
Proposition 4: Business units can derive higher value from Web-based
procurement only by Web-enabling the dominant type of procurement
process.
Degree of centralization: Web-based procurement systems enable
organizations to centralize their purchase processes while at the same time
given enough flexibility to the local units to serve their local sourcing needs.
Centralized procurement benefits a business unit in three ways. First, the
20. Value of B2B E-Commerce
17
administrative costs (part of the transaction costs) are spread over a larger
volume of purchases, thus reducing the operational costs for each business
unit. Second, the visibility of enterprise-wide procurement demand and
preferences helps buyers to negotiate lower prices for goods and services.
Third, centralized control and monitoring, combined with the user-friendly
Web interface motivates more users to order through the e-procurement
system and reduces the volume of “off-contract” purchases. Since most of
these purchases cost more and are charged to the business unit, reduction in
“off-contract” purchases benefits the business unit.
Proposition 5: The value of Web-based procurement system will be
higher for a business unit that achieves a greater increase in centralization
due to the use of Web.
5.3
Extended enterprise
While the characteristics of business units help us establish the value of
implementing Web-based procurement system in a particular business unit,
the participation of external partners, such as suppliers, is necessary to
realize the value of the Web across the supply chain. A supplier, who is able
to manage its production operations efficiently based on timely and accurate
information received from the buyer, as well as its down-stream suppliers,
benefits the entire supply chain. The factors that are important to realize the
value of the Web relate to the organization of the supply chain and
technology adoption, participation of the individual players, and the structure
of the industry.
Integration of e-procurement with enterprise systems: E-procurement
systems interact with other information systems in the enterprise and the
supply chain to enable the procurement process. For example, inventory,
personnel data and supplier data are accessed from the ERP system of the
buyer. Design systems provide data for product development process.
Supplier’s manufacturing information system is accessed for fulfillment
information and order tracking. The full potential of an e-procurement
system can be realized only when all the information exchange and sharing
is done electronically, with minimum need for turnover of paper documents.
For example, even if the buyer side of procurement process is fully
automated and the purchase order is sent electronically to the supplier, if the
supplier prints the purchase order and re-keys the data into his own system,
the chances for errors and delays are increased, reducing the benefits of eprocurement.
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C. Subramaniam & M. Shaw
Proposition 6a: Web-based procurement systems that have greater
integration with existing enterprise systems yield higher value than
procurement systems with lower integration.
Among the various information system applications present in
organizations, some are closely related while others are disparate. For
example, the functions of production planning and materials management
may be closely connected, while production planning and human resource
management may not have such close connection. As we integrate the
existing information system applications into e-procurement, connecting to
closely related systems helps leverage the synergy among those systems. An
e-procurement system connected to production planning benefits more if it
also connected to materials management, but benefits may be less if
connected to human resource management.
Proposition 6b: Web-based procurement systems that are integrated with
closely related systems result in higher value.
Participation of business partners: From the enterprise point of view,
business units and suppliers are the two most important participants in eprocurement system. Business unit procurement managers are reluctant to
reduce their control over procurement decisions and hence need strong
incentives to motivate their users to purchase through the Web-based
procurement systems. Suppliers are resistant to Web-based procurement as
they anticipate fierce competition online and they need strong incentives to
Web-enable their catalog and ordering process. The potential value of the
system cannot be realized unless both users and suppliers participate in the
system. There is also a behavioral aspect involved here. Higher participation
by business units or supplier convinces the benefits of Web-based
procurement and motivates them to participate. However, increased
participation by business units or suppliers alone is not sufficient to realize
significant benefits of e-procurement. In fact, we expect that the benefits are
modest at low participation of business units, irrespective of the level of
participation of the suppliers. Similarly, the benefits are expected to be
modest at low participation of suppliers, irrespective of the level of
participation of business units.
Proposition 7a: The value realized from Web-based procurement system
is low when a small number of business units participate in the system,
irrespective of the number of suppliers participating.
20. Value of B2B E-Commerce
19
Proposition 7b: The value realized from a Web-based procurement
system is low when a small number of suppliers participate in the system,
irrespective of the number of business units participating.
We expect a synergy effect depending on who participates in eprocurement, similar to that proposed in e-procurement integration. In the
“extended enterprise” supply chain, partners who have a close business
relationships may add more value if they participate together in the system,
rather than the participation by two unrelated partners. Suppose an MRO
supplier and its suppliers participate in e-procurement, inefficiencies are
reduced to a greater extent as information flow is optimized at a greater
extent in the purchase process. But, if an MRO supplier and an office
products supplier participate in e-procurement, each purchase process needs
to be optimized, which cannot be done without participation of the lower
tiers of suppliers.
Proposition 7c: In Web-based procurement, participation by business
partners, who themselves have closer business relationships in the same
product supply chain, results in higher value than participation by suppliers
not related in the supply chain.
Industry fragmentation: The characteristics of the industry play an
important role in realizing the benefits of Web-based procurement. Industry
fragmentation of the demand or supply is an important factor that can be
managed by using the Web. In an industry fragmented on the demand,
supply or both sides, we expect high levels of search costs and inefficiencies
in the traditional procurement. Intermediaries play an important role in
reducing the transaction costs, but even they are limited by technology.
Such industries are greatly benefited by the Web, which allows the
integration of demand and supply on a global scale. We expect that
enterprises that procure from a fragmented product supply chain derive
higher benefits from Web-based procurement.
Proposition 8: The value of Web-based procurement is greater if the
existing product supply chain is more fragmented on the demand, supply or
both sides.
20
6.
C. Subramaniam & M. Shaw
IMPLICATIONS OF THE ANALYSIS FOR THE
DEVELOPMENT OF ADOPTION STRATEGIES
Buyer organizations implementing a buy-side Web-based procurement
system cannot do it in one-step. There are two major strategies to choose
from.
1. All the purchases can be Web-enabled, but the system is
implemented one business unit at a time.
2. A specific type of purchase is Web-enabled across the enterprise,
and after successful implementation, the next type of purchase is
Web-enabled.
In addition, the buyer organization should also consider the participation of
suppliers in order to realize the benefits from the Web.
If the organization chooses to implement by business units, then it will
compare the characteristics of business units to decide where to implement
first. The units with the highest decentralization of existing purchases
should be chosen because of the potential for greatest change in
centralization (proposition 5) and resulting higher benefits. However, if the
choice is between business units with similar distributions of purchase types,
the larger the unit, the greater the benefits from Web-based procurement
(proposition 3). After a business unit has been chosen for implementation,
the type of purchase to implement first is decided by its proportion of
structured and unstructured procurement, and its inventory levels. If the
business unit has a higher proportion of structured procurement that deals
with highly fragmented product supply-chains, Web-enabling structured
procurement yields greatest benefits (proposition 8). Otherwise, Webenabling unstructured procurement yields greatest benefits.
If the implementation strategy involves enterprise-wide adoption of the
system, the process type and complexity play a critical role in selecting
which purchases to Web-enable first. Unstructured and complex purchases
involve a high level of search and coordination. They also require stricter
control in view of potential non-compliance hazards. This type of purchases
requires higher levels of human interaction. Thus, the firm should Webenable the search process of unstructured and complex purchases in order to
derive maximum benefits (proposition 1 and 2). However, if the proportion
of unstructured and complex purchases is very low compared to other types
of purchases, the greatest benefit comes from Web-enabling moderately
complex purchases.
20. Value of B2B E-Commerce
21
Once an implementation strategy is chosen, there are two critical factors
that influence the realization of maximum benefits – integration of Webbased procurement with current systems and the participation of suppliers.
The procurement system should be designed to automatically retrieve and
use data that is already available in the system, instead of duplicating the
input. Also, it should provide the necessary data required by other
applications. The greater the level of the integration with the organization
and supplier systems, the greater will be the benefits (proposition 6a). In a
manufacturing organization, purchasing is closely linked with engineering
design and materials management, because of the higher need for
customized components. The focus in implementation should be to integrate
the Web-based procurement system with the design and materials
management applications, rather than with accounting or human resource
applications (proposition 6b). Thus, buyer organizations should not only
integrate with other applications, but integrate with applications whose
functions are closely related to the procurement process.
The other critical factor is participation. In order to encourage more use
of the Web-based system, more suppliers have to be included in the
procurement systems by adding their products to the electronic catalog
(proposition 7, 7b). However, if the suppliers who are connected to the
buyer-side system are themselves connected to their suppliers, there is
further reduction in the cycle time and errors and improved coordination is
possible. This leads to higher benefits than if two suppliers not related in the
supply chain are added to the catalog (proposition 7c). Hence, buyer
organizations should not only look to add more of their suppliers to the
system, they should also motivate the suppliers’ suppliers to join the Webbased system.
7.
CONCLUSION
An important question in the mind of B2B managers and researchers
relates to the “right approach” to implement B2B e-commerce in
organizations. Knowing how the Web creates value and what factors affect
this value is important to answering this question. In this chapter, we have
presented a valuation framework to identify the B2B tasks and performance
measures that are impacted by the Web and how the process, organization,
and “extended enterprise” characteristics determine the level of the value. In
the next chapter, we will use a theoretical model and an empirical study to
verify our propositions, with a focus on process level characteristics.
22
C. Subramaniam & M. Shaw
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